Northgate sifting through its expanding portfolio

One of the most active investors in the Canadian mining industry is preparing to embark on a period of self analysis.

After a $100-million shopping binge in which it picked up minority interests in nine companies, Northgate Exploration (TSE) will spend much of 1989 evaluating the assets in its portfolio.

Over the 10 months in which it redeployed some of the cash it received from selling its Chibougamau gold/copper mines to Western Mining of Australia for $160 million, Northgate has taken on the appearance of a mining finance house.

With $160 million in cash, it has board representation and an option to increase its interest in a stable of companies including Chelsea Resources (VSE), Campbell Resources (TSE), Holmer Gold Mines, (ASE) Audrey Resources (TSE), Geddes Resources (TSE), ABM Mining Group, Sonora Gold Corp. (TSE) and Neptune Resources (TSE). Added to its equity stake in Orofino Resources (TSE), Ennex International and Whim Creek Consolidated, that adds up to a share of 150,000 oz per year of gold production.

But Northgate’s new look is one which analysts find hard to evaluate and President John Kearney will attempt to shed the holding company image after he has completed at least one more deal.

“If 1988 was the year of acquisitions, 1989 will be the year of rationalization,” said Kearney who believes that the company’s confusing structure is one reason why the common shares are currently trading at $6.88 on the Toronto Stock Exchange.

Armed with a mandate to make Northgate a larger North America oriented concern than the one which produced 70,000 oz gold and 16.1 million lb copper at its Chibougamau, Que., mines last year, he plans to begin the rationalization process in the latter half of 1989.

“We will increase our interest in the companies we like and sell off our interest in the others,” he said.

One of the company’s that does not fit into Northgate’s long-term plans is Chelsea Resources. Although Northgate put up $1.2 million for a 20% direct interest in Chelsea’s high grade Spotted Horse in Montana, grades have fallen well short of an expected 10,000 oz annually.

“Our investment in Chelsea was due to the high grade (a projected 1 oz gold per ton) nature of the ore,” said Kearney. “But we found that the operation is too small and the grade doesn’t compensate for the problems there.” Asked if he would sell the asset, Kearney replied, “It would make an interesting property for a small junior.”

Ironically, Chelsea was the first of a rapid fire series of investments to be announced after Northgate sold its Chibougamau mines to Western Mining.

Tabled in February, it was followed a few days later by a similar investment in Campbell Resources. Northgate spent $19.7 million for a 13% stake in Campbell (and an option to increase its interest to 19.6%) which operates three Chibougamau gold copper mines. The deal was financed through the sale of a $40-million debenture to Brascan-controlled Great Lakes Group which holds an 18% stake in Northgate.

Although Campbell reported a 1987 net loss of $11.2 million, the acquisition was considered a good opportunity for Northgate to re- establish itself in the Chibougamau camp.

In the 10 months since the deal was announced, Campbell’s U.S. coal interests which usually produce about 500,000 tons of coal annually have been written off. The Henderson II gold mine in Chibougamau is being shut down due to lack of reserves while an expansion program will double the throughput to 1,800 from 700 tons per day at Meston Lake.

In April, Northgate took a calculated gamble by acquiring for $7 million a 21% stake in Toronto- based Geddes Resources which was attempting to find an economic gold deposit at the remote Windy Craggy project in British Columbia.

Even though subsequent drill results suggest that the copper/ cobalt project won’t support a separate gold mine, Kearney said he is happy with the investment in Geddes. “The challenge is to make a major mine out of the whole thing,” he said.

Just as challenging is the task of bringing Neptune Resources’ Colomac gold mine into production, said Kearney who considers the new asset to be potentially Northgate’s best buy. In October, Northgate said it would inject $8 million into Neptune Resources (representing a 20% interest) to finance Colomac, its Northwest Territories gold project, into production.

Northgate also arranged to acquire a 35% interest for $5 million in Gold Reserve Corp., a U.S. gold investment firm which financed the Colomac program through a $48 million gold loan.

With reserves standing at 16 million tons of grade 0.064 oz gold, the company is planning to start a 10,000-ton-per-day operation in 1990. But the grade is considered marginal for such a remote project and there are still a number of hurdles to cross before the project can be brought on stream.

“The potential value per dollar invested is probably the best but there is a certain amount of risk to go with it,” he said.

Other acquisitions completed this year include an option to purchase 32% of Holmer Gold Mines’ outstanding shares. Holmer is involved in a couple of gold exploration joint ventures with Campbell Resources and Chevron Canada Resources at Chibougamau and Timmins, Ont., respectively.

In April, Northgate dipped into its treasury to pick up a 20% stake in Audrey Resources of Rouyn- Noranda, Que., for $6.1 million. Audrey is currently spending $14 million to build a new mill at its Mobrun polymetallic mine site.

In July, Northgate said it would spend $40 million to gain a major interest in the Vancouver-based ABM Mining Group which holds a 32% stake in Sonora Gold and a 15% net profits interest in the Jamestown gold mine in California. The mine has been plagued by high costs and low recoveries, but Kearney says the costs can be trimmed to around $250(US) from $344 per oz and production stabilized at around 100,000 oz annually. In a separate transaction, Northgate also bought 20% of Sonora’s treasury shares for $12.4 million.

While Kearney was reluctant to be specific on the form that Northgate’s rationalization process will take, a recent agreement involving Westfield Minerals (TSE) offers some indication.

In October, Northgate and Westfield agreed to pool several assets including Whim Creek Consolidated and Ennex International into a new holding company called Norwest Holdings. Under the agreement, Westfield has the right to purchase Northgate’s 49% stake in Norwest for $34.5 million until April 30, 1990.

Kearney said consummation of the agreement will depend largely on Westfield’s progress at the Choquelimpie gold silver deposit in northern Chile. “It is an option to sell, not a commitment.”